Moody’s Warns on Japan’s Fiscal Discipline Under Kan Update1 – Bloomberg.com

More news the Japanese don’t need as Moody’s issues a warning:

Moody’s rates Japan’s debt at Aa2, the third-highest investment grade, with a stable outlook. Byrne said the nation’s sovereign outlook in the medium term depends on “stronger economic growth and a return to a gradual course of deficit reduction and debt containment.”

“While we believe the domestic market will readily absorb even the record level of JGB issuance this year, strains on JGB yields could emerge in outlying years,” Byrne said. Local residents held 94 percent of Japanese government bonds as of June, Finance Ministry data show.

via Moody’s Warns on Japan’s Fiscal Discipline Under Kan Update1 – Bloomberg.com.

94 percent of Japanse government bonds are in domestic hands. That’s an astonishing statistic on a few levels. First, their appetite for government debt has been quite astonishing. Second, the fact that it’s being held in their hands probably means most outsiders don’t see the point in investing in a country with two decades of stagnant GDP and only getting 10 to 50 basis points in yield depending on the term.

An IMF report projects Japan’s debt-to-GDP ratio will be  2.46 (246% of GDP) by 2014. That is a harrowing statistic. The rates have been so low, the debt service coverage has been accomodated, but with the host of other issues the country has (mostly stemming from its aging population and low birth rate), you get the feeling you’re watching the Bataan Death March of their economy.

And it’s not a good feeling, either…

But here’s something to think about: What if the risks Moody’s alluded to are more near-term than they recognize? What would the repercussions be? A collapse in the Yen? Skyrocketing rates as the local investors lose faith in those bonds? If you ask enough questions like that, then you can start doing some contingency analysis/planning before it’s too late.

Which, as I read Andrew Ross Sorkin’s book Too Big to Fail, definitely came to mind. I’ll have more to say on his book after I finish reading it.

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Filed under finance, government, International, Markets, Way Forward

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